Issue link: http://viewer.e-digitaledition.com/i/184473
++++++++++++++++++++++++++++ +++ + +++ Í FINANCIAL PLANNING + ++++++++++++++++++++++++++++ Mitigating the Fiduciary Risk of 401(k) Retirement Plans By Terry Langston A many small business owners who offer employees a 401(k) plan is the amount of fiduciary risk employers are subject to, especially in light of recent headlines. Employees are bringing lawsuits, with dozens of class-action lawsuits being filed. In part, this is being driven by far greater fee transparency created after the financial crisis. The U.S. Department of Labor's (DOL) new retirement plan fee disclosure regulations are providing employees an annual, plain-language view of their retirement plans' fees. New websites that use Freedom of Information Act requests to gain access to employer's mandatory plan filings with the DOL, such as BrightScope.com, have been created. Using this data, the websites can create retirement plan "report cards" that make benchmarking an employer's 401(k) fees as easy as typing in the name of the plan. The Wall Street Journal recently reported that a Yale Law School professor sent letters to 6,000 different company sponsors utilizing the employer's own data which had been filed with the DOL and accessible through sites like BrightScope.com. This had the effect of putting them on notice that their plans had above-average fees that could be used in future litigation. Some industry insiders feel future 401(k) class-action lawsuits could equal the scope of the tobacco industry litigation. In August, Consumer Reports reported six different "signs of a dud 401(k)" in an article titled "How to Grow Your Savings": "no [low-fee] index funds, expense ratios of 1 percent or more, delayed vesting of employer match, matches only in company CORE CONCERN FOR stock, funds not diversified, [and] low or nonexistent employer match." While large employers have the resources to employ teams of consultants, lawyers and outside professionals to manage their 401(k) plans, small and medium-sized businesses typically don't have the same resources. Evidence shows that smaller company retirement plans have both higher fees and lower-quality investment options (to their employees' detriment). One solution in managing fiduciary risk and insulating yourself from the responsibility and legal liability for the selection and monitoring of investments is choosing an ERISA 3(38) advisor. While many financial advisors claim to be "fiduciaries," there are two very different levels of fiduciary: the common ERISA 3(21) fiduciary and the higher-level ERISA 3(38) manager. By law a 3(38) fiduciary must be a registered investment advisor, a bank or an insurance company, and their 3(38) status must be stated in writing in the retirement plan documents. Unlike the hiring of a 3(21) fiduciary, appointing a 3(38) fiduciary as the plan's investment manager insulates the plan sponsor against losses (or inadequate gains) arising from claims that the investments were not appropriate or prudent. Plan sponsors who appoint a 3(38) investment manager to control the selection and monitoring of the plan's investments are responsible only for the prudent selection and monitoring of the investment manager — a much more manageable task for most small- to medium-sized businesses. Terry Langston is SIPCO's Director of Retail Sales and Marketing and serves high-net-worth clients. Contact him at tlangston@sipllc.com for financial advice catered to your practice. I